Energy Efficiency Should Connect Customers and Innovate Partners

How Utilities Can Become Efficiency Innovators

Greentech Media, November 28, 2016

The New York Public Service Commission, seeking innovative solutions in its Reforming the Energy Vision proceeding, instead opted for an outcome-oriented approach to measuring and incentivizing efficiency performance. An outcome-oriented metric would focus on the policy goal of reduced energy use overall, putting a smaller emphasis on the administratively intensive business of attributing savings to specific actions.

New York’s Clean Energy Advisory Council added detail to the commission direction when it released its Energy Efficiency Metrics and Targets Options Reporton implementing the New York Commission’s orders last month. The report represents a radical departure from program-based efficiency regulation, and highlights both opportunities and implementation challenges.

No state has ever before tried this kind of performance-based ratemaking for energy efficiency, and it could become a powerful new tool to expand investment. Ultimately, transparency and adaptability will be essential conditions to ensure an outcome-oriented approach achieves deep efficiency savings.

Thirty-six states measure utility performance on attributed “deemed savings” values for efficiency upgrades, which are average estimates for a given technology. For example, replacing an incandescent light bulb with a 15-watt CFL bulb is considered to save 71 kilowatt-hours per year in Vermont. But savings estimates are subject to change as technologies, standards and customer behaviors evolve — for example, switching to CFLs is estimated to save only 18 kilowatt-hours per year in California.

This “deemed savings” approach is attractive because of its relatively low administrative cost, but it sacrifices some accuracy in the process. In the end, utilities under deemed-savings approaches will prioritize activities producing cost-effective efficiency savings on average, but they are not incentivized to innovate and drive deep market transformation.

Take LED lighting: Typically, this is deemed among the most cost-effective measures a utility can undertake, even though real-world savings may be underwhelming depending on factors like how many hours per year those lights are turned on. Building retrofits are the opposite; they are often deemed less cost-effective on average, though some buildings have massive potential to achieve huge, cost-effective savings.

Using averages for deemed savings can stifle innovation in the market, resulting in over-rewarding some activities that deliver less ambitious outcomes, and conversely under-rewarding some of the best opportunities. Efficiency programs should encourage utilities to connect customers and innovative partners to maximize real-world savings, no matter the means.

To better align incentives, deemed savings could be adaptive, but building real-time updates for hundreds of thousands of efficiency investments into an incentive program has been resource-intensive and messy. Nowhere was this more apparent than in California’s old Risk-Reward Incentive Mechanism, which required utilities to measure and report each efficiency measure individually, rather than rely on preordained deemed savings estimates. In 2006, California spent 7.6 percent of efficiency program funding on EM&V — double the U.S. average of 3 percent to 5 percent. In addition, the lack of transparency meant utility incentives swung drastically due to disagreements on the savings achieved.

That doesn’t mean a measure-by-measure approach is unworkable. Deemed savings approaches have largely succeeded in driving meaningful, cost-effective efficiency savings. Independent stakeholder processes like the Northwest Regional Technical Forum build adaptation into deemed-savings approaches. Advanced data analytics mean real-time measurement is becoming more accurate, and deemed-savings approaches may become obsolete in the face of an emergence of a different kind of real-time, bottom-up approach like metered energy efficiency.

Still, focusing on outcomes rather than activity tracking has the potential to shift focus toward achieving the energy savings and market transformation policymakers seek.